Mumbai: Multi Commodity Exchange Ltd, or MCX, the country’s largest commodity exchange with a more than 75% market share, is yet to receive approval from market regulator Securities and Exchange Board of India, or Sebi, to begin trading in currency futures. Rival National Stock Exchange Ltd, or NSE, which launched mock trading in currency futures on Tuesday, will start regular trading on 29 August after having received Sebi approval.
MCX is not giving up. It has already set up a stock exchange subsidiary for currency futures trading, which is a key imperative for MCX, according to managing director and CEO Joseph Massey. MCX is regulated by the Forward Markets Commission, or FMC, the commodities market regulator, while currency futures trading is overseen by Sebi.
Globally, commodity traders are the biggest users of currency futures, Massey said in an interview. Edited excerpts:
NSE has got the Sebi nod for currency futures trading. You have missed the bus.
Unlike NSE, it is a two-stage process for us (to get Sebi approval). Since we are a commodity exchange, we are creating a subsidiary which will apply for the currency exchange. NSE is already regulated by Sebi and it is creating a division for currency trading. Its division has got Sebi approval and it happened faster as NSE did not have to float a new company. In our case, the subsidiary has to be incorporated and it has to be recognized by Sebi.
So, you are floating a stock exchange?
Yes. The Reserve Bank of India-Sebi committee (which formalized the guidelines for currency futures trading) said that an existing exchange or a new exchange can take part in the exchange-traded currency market. We have the option for doing it as a division of MCX or floating a subsidiary. We chose the second path as there is a regulatory conflict. MCX is regulated by FMC and the currency exchange is regulated by Sebi.
Upbeat note: Managing director and CEO Joseph Massey is hopeful of MCX getting regulatory approval for currency trading.
The new company, MCX Stock Exchange, has been incorporated. MCX is the majority shareholder and Financial Technologies (India) Ltd is the other stakeholder.
Why are you so keen? After all, your commodity traders can always conduct business on the NSE platform.
Globally, the currency market evolved around the commodities market. In India, we have chosen a path which is achievable but a bit capital intensive. This model is accepted by all of us and we are moving in the right direction. The challenge is to take this product to every nook and corner of the country and at the right price. And, competition is always good for the market— both for the regulators as well as consumers. We have seen the benefit of competition in airline, telecom, banking and so many other sectors.
When do you expect to start?
We believe that if we are to work within the existing framework, we will be able to achieve it within a month or so. We are not talking about a very long time, unless something exceptional happens.
Do you see any design behind this to deny you the first-mover advantage?
People normally say “everything is fair in love and war.” From that perspective, whenever something works to your disadvantage the normal doubt that creeps in your mind is that something was wrong… It’s human tendency. (But) we are getting positive response from the regulator and everyone is quite open about the fact that they want competition and all kinds of support are being extended to us.
Is MCX better equipped than NSE for currency trading?
Exchange management is a function of technology and domain knowledge. On both these counts, our group certainly has an advantage. We have a technology which has worked for currency trading for last six years. We are in spot and forward markets and we also run a currency futures market outside India—in Dubai.
In India, our foreign exchange trading platform, IBS Forex, which is running spot and forward, is used by 25 large Indian and foreign banks and it has done more than $1 trillion (Rs43 trillion) worth of trading in the last six years. Our understanding of the derivatives market is very good.
We are present in multiple markets and work under multiple regulators, complying with multiple norms.
For instance, we are governed by FMC for commodities trading, in Dubai we are regulated by an international regulator; we have got the licence to set up an exchange in Singapore under MAS (Monetary Authority of Singapore); and we have got another licence to start an exchange in Mauritius.
Besides, we run an electricity exchange in India which is governed by CERC (Central Electricity Regulatory Commission) while the IBS Forex follows RBI and FEDAI (Foreign Exchange Dealers’ Association of India) norms… Working with multiple regulators for multiple products is a tremendous advantage for us.
What will be the impact of the proposed commodity transaction tax on your business?
The impact will be quite serious. On an earlier occasion, a proposal to impose a similar tax on debt trading was reversed. The cost of trading has a very serious implication for any market. This becomes more serious if alternatives are available with the traders. If the cost of trading becomes more expensive, people will switch to global markets or even illegal markets.
Today, we charge Rs2 per Rs1 lakh worth of trade and after the proposed tax, the cost of trading will go up to Rs19 (per Rs1 lakh). Even at Rs2, it’s expensive compared with global standards. At Rs19, there won’t be any trader.
This will impact your valuation. Is this why your initial public offering has been deferred?
The market sentiment is not good and we have been advised by our investment bankers to wait for a suitable time.